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Thursday, February 28, 2013

Well, it was probably only a matter of time:a German anti-euro party has just come onto the scene.

Deutsche Wirtschafts Nachrichtenreports that the new party will launch in April under the name "Alternative for Germany". The party appears to be an offspring of "Wahlalternative 2013"
(Election Alternative 2013) - a group consisting mostly of academics but also including Hans-Olaf Henkel, the well-known and outspoken former head
of Germany's employers federation BDI.

Despite widespread and continued public scepticism towards the eurozone bailouts in Germany - 63% of Germans are against a Cypriot bailout for example and some polls show that around two-thirds of Germans think they would be better off with the Deutschmark - there is no political party in Germany that is openly sceptical of the euro itself, unlike in other eurozone creditor states such as Austria, theNetherlands and Finland. The new formation will clearly try to fill that vacuum.

So what precisely does the group stand for? Well, according to their website:

1. Germany should no longer guarantee debts of other States, in accordance with the Maastricht Treaty.2. The single currency should be abandoned. All States
should be free to leave to euro and enter currency associations which
fit them (northern and southern euro) or introduce parallel currencies.3. A referendum before the German Federal Republic transfers considerable sovereignty [to the EU]
On Facebook, the group specifies that they will campaign for a return to "national currencies or smaller currency associations". So, strictly speaking, it won't be a pure D-Mark party.

So will this new party have an immediate impact - a German mirror image of Beppe Grillo? Unlikely. In order to make it into the Bundestag, parties need to get over 5% of the votes - which, absent a major turn of events, won't happen (even 1% would be a decent outcome). Perhaps the 2014 European Parliament elections - where the 5% threshold doesn't apply and voters feel less constrained about venting their frustrations with Europe - can be the party's platform, but even that will be tough.

It was perhaps telling that a leaked email from one of the founders, Hamburg-based economics professor Bernd Lucke, revealed that the leadership of the Free Voters - a political movement active primarily in Bavaria toying with anti-euro ideas and which managed to secure 10% of the vote in the last local elections - declined to join forces with Alternative for Germany. DWN notes that this may mean that the political anti-euro community is split even before they properly come into existence.

The deal looks much as expected, although a couple of
changes have been added:

Bonuses should be limited at a 1:1 ratio to salary, which
can rise to 2:1 with explicit shareholder approval.

Up to a quarter of variable pay can be discounted and
issued in instruments deferred for more than five years, which could increase
the ratio above 2:1.

Bonuses in the form of long term equity or debt that can be bailed in if a bank fails will
also be given more favourable treatment.

Surprisingly, the deal still includes plans to force
subsidiaries of foreign banks in the EU to adhere to the bonus rules and, more
importantly, forcing all subsidiaries of EU banks in the rest of the world to do so.
This could hamper competitiveness and, we suspect, may still be subject to
changes. This is also an area where the UK might have expected to receive a concession.

What happens now then? EU finance ministers meet next
week and will discuss the proposals. Significant changes seem unlikely, which
could mark a loss for the UK, which has vehemently opposed the rules from the
start.

The real question for the UK is whether it should try to
force a formal vote on the issue at the meeting of finance ministers. This
would raise the prospect of voting down the UK on a financial
services issue – that this has never happened before is often cited
by the EU as a counterargument against UK concerns over EU financial
regulation. If the UK is outvoted it would mark a potentially significant precedent for
the UK's future relations with the EU.

It should be remembered though that this is only a small
part of the large CRD IV package, which has been continuously delayed due to MEPs' demands for bank bonuses to be included. The UK
has managed to secure favourable treatment on the key aspect of the legislation
– the ability to adjust national capital requirements for banks.

As we have suggested before, the debate on bank bonuses
seems slightly tangential in terms of the wider debate over bank capital and broader
financial stability (indeed there are valid question about why it has been lumped in with CRD IV at all). For all the talk of needing bank bonuses to limit risk
taking and moral hazard in banks, the EU has supported and approved €1.6
trillion in state aid to banks over the course of the financial crisis. Many
countries have pushed for limits to capital requirements and supported the easing of the Basel III liquidity controls. The EU, and the eurozone in
particular, has also consistently argued for and supported bank bailouts and
refused to countenance imposing losses on bank creditors, instead shifting the
burden to taxpayers.

Trying to limit moral hazard by tackling excessive bank
bonuses is all well and good, but it is a drop in the ocean when it remains
clear that states and central banks will continue to bailout banks at any cost.

Wednesday, February 27, 2013

As expected, Pier Luigi Bersani and his centre-left coalition have tried to reach out to Beppe Grillo. But Bersani didn't quite obtain the reaction he was hoping for.

On his blog, Grillo has posted a round-up of comments made during the electoral campaign by Bersani regarding both the comedian himself and the Five-Star Movement , under the headline "Bersani: a dead man talking" (see the picture). Here's a sample:

"There's little democracy in the Five-Star Movement."

Five-Star Movement people are "web fascists. Come out call us zombies."

"With Grillo, we will end like Greece."

"Lenin is not even nearly as bad as Grillo."

"Grillo leads to disaster."

"Grillo makes promises like Berlusconi."

"If Grillo wins, the country will be in trouble."

"Grillo? He can take us out of Europe."

"Grillo takes people out of democracy."

"Grillo is a third-rate autocrat."

Grillo says in the blog post:

"Bersani is a political stalker. He's been pestering the Five-Star Movement for days with indecent proposals, instead of resigning as everyone else would do in his situation."

"Over the past twenty years, [Bersani's] Democratic Party was in government for ten years, and over the past year-and-a-half it even took part in the grand coalition government with [Berlusconi's] PdL party, backing any sort of junk proposed by Rigor Montis [Grillo's nickname for Mario Monti]."

"The Five-Star Movement won't give any confidence vote to the Democratic Party or others. It will support in parliament only the laws that mirror its programme - whoever proposes them."

So Bersani's first charm offensive (which we explained in more detail here) hasn't been very successful, and the centre-left leader is now in a quite uncomfortable situation. Bersani will almost certainly try again, but if cooperation with the Five-Star Movement proves a non-starter, he may face a tough choice (as we pointed out in our reaction to the Italian election results):

a) Go cap-in-hand to Berlusconi and say, "Scusa Silvio, we just changed our mind. Are you still up for a grand coalition?"

b) Throw in the towel and admit that there is no alternative but to call new elections.

One last thing: it's interesting to note that several people commenting underneath the post urge Grillo to be a bit more cautious, given the "historic opportunity" the Five-Star Movement has to change Italy. Will Beppe listen?

One of the many sub-stories of the Italian election is how it calls into question the ECB's bond-buying programme - the Outright Monetary Transactions (OMT). Not so much because of the ECB's ability to expand its balance sheet and stand behind Italy and Spain (though there's a clear cost to that). The reason is another one: unpredictable politics.

This is something we highlighted immediately following Mario Draghi's announcement to launch the OMT, in September 2012. We said:

"It will also be virtually impossible for the ECB to impose effective conditionality on debtor countries, meaning that the ECB can only hope that a series of unpredictable political decisions in member states will go in its favour."

To inject such conditionality, the OMT was linked to the European Stability Mechanism - the eurozone's permanent bailout fund - which comes with strict conditions (or at least is supposed to). To tap the OMT, a country has to be on an ESM programme. But, in effect, this made the OMT - despite it being run by an independent central bank - hostage to parliamentary and electoral politics.

As we argued in our analysis on the German Constitutional Court ruling on the ESM - a few days after the OMT announcement in September last year:

"...the ruling and the role of the Bundestag highlights that activating the OMT will be challenging, since in order to qualify for ECB bond-buying, a country must first get funding from the ESM – and be subject to conditions. If the Bundestag agrees to activate more bailouts, it will most certainly push for harsher conditions than what debtor countries – most importantly Spain – are willing to accept. In the long-term, under current arrangements of linking ESM and OMT, the latter is also effectively capped and subject to a Bundestag veto."

“People have forgotten that the OMT cannot be triggered without a vote in the German Bundestag. This is going to be a huge problem, and we may be back to the political stand-off between the North and South of Europe,”

And in our flash analysis yesterday, looking at the Italian election results, we noted:

“A fragmented, anti-austerity Italian parliament could also make it far more difficult for the country to tap the ECB’s OMT. This is because it would need to access the European Stability Mechanism simultaneously, meaning a series of strict conditions – which Berlusconi and others could resist – and approval from several Northern Eurozone parliaments, including from the Bundestag.”

Then again, if it ever came to a point where Italy actually needed to tap the OMT, things might be so bad that politicians on both sides (probably during a panic-stricken weekend) could be scared into accepting whatever ESM-deal that could be struck.

But it all goes to show that in the eurozone, there's no escaping the politics.

Yesterday Bild's online edition asked will the Italians destroy or euro? Today the same headline appears in the print edition, complete with a mock up of as Grillo and Berlusconi as clowns.

However, its not just the tabloid press that are using this analogy - Peer Steinbrück, the SPD's chancellor candidate, yesterday told a rally that "I am appalled that two clowns have won", going on to warn that the result would likely increase problems within the eurozone.

The North - South tensions in the eurozone are unlikely to easy anytime soon...

Tuesday, February 26, 2013

Italy's centre-left leader Pier Luigi Bersani has just held his first post-election press conference. He's clearly not as good at soundbites as Beppe Grillo (or Berlusconi), but this is the gist of what he said:

The centre-left coalition is willing to "take its responsibilities" given that it got most seats in both houses of the Italian parliament;

He said of Beppe Grillo and the Five-Star Movement,

"They used to tell us to 'go home'. Now they're in [parliament] too. Italy is also their country. Let's see what they want to do for their country."

Crucially, Bersani said that, if asked to form the new government, he will put forward a "programme" - basically a to-do list for the next government, including changes to the electoral law, cuts to the cost of bureaucracy and politics in general and new policies for job creation to be discussed at the European level (whatever that means).

His line was that it's more important to "discuss what we want to do for this country" rather than wasting time on "diplomatic" exercises in an attempt to form a 'traditional' coalition.

And that sounds very similar to Grillo said earlier today, i.e. taking a policy-by-policy approach rather than going for a fixed coalition (as opposed to Berlusconi, who seems quite keen on a proper 'grand coalition'). So, could there be some sort of loose Bersani-Grillo alliance emerging?

Responses to the extraordinary results of the Italian elections have started to come in from around the rest of Europe, the most interesting of which we include below. Predictably, an instant raft of warnings has come out from Northern Europe and Brussels.

Kicking off is German Foreign Minister Guido Westerwelle who argued that:

“It is necessary for Italy – but also because Italy is so important – for the whole of Europe for a new strong and capable government to be formed as quickly as possible. The politically responsible people in Rome recognise that Italy needs a continuation of a policy of reform, of consolidation, one which is able to secure the confidence of the citizens and the markets.”

If only the the "responsible people in Rome" were in charge of selecting a new PM. German Economy Minister Philipp Rösler also emphasised the need to stay the course, irrespective of government:

“I could have imagined a better outcome for the reformers in Italy. There is however no alternative to the previously adopted path of structural reforms.”

As did the CDU/CSU’s parliamentary faction leader Michael Grosse-Brömer:

“The reform path of Monti has to be continued consequently.”

Not everyone in Germany agrees though, with SPD MP Klaus Barthel (very much on the left of the party) telling Handelsblatt that:

“Mrs Merkel delivered enough substance to Berlusconi’s nationalist slogans. Her advances to the teutons [i.e. traditional Germanic values] bring perhaps one or two votes [at home] but come back negatively a million times over from the neighbours.”

"Having a stable government in Italy is important for Europe. In that respect, the outcome does not make us cheerful… I assume that, no matter what a new government in Italy looks like, it will live up to the agreements that have been made".

Over in Austria, Chancellor Werner Faymann gave a pretty cautious response:

“The euro remains stable even when in some countries it is not clear yet who will build the government.”

Meanwhile, over in France Finance Minister Pierre Moscovici said that while the result "creates problems", it would not undermine the single currency, while the Minister for Industrial Renewal, Arnaud Montebourg, claimed the result showed that "Italians do not agree with market imposed policies".

"I fear for a deadlock during a certain period… If it now comes to a standstill this can be very dangerous, also for financial markets".

He should know a thing or two about political deadlocks...

Meanwhile, the European Commission (whose favoured candidate got a bit of a drubbing), also issued a hilariously contradictory response, claiming that "We clearly hear the message of concern expressed by Italian citizens”, while also arguing that Monti's reform and fiscal-consolidation agenda were necessary to "underpin everybody's confidence" in the Italian economy, and the Commission "expects compliance".

"This is a scenario that no one had wished for... This is not just bad for Italy, but also a nightmare for Europe."

Spanish Finance Minister Jose Manuel Garcia-Margallo was also alarmist, warning that there was "extreme concern" about the financial consequences, adding that "This is a jump to nowhere with positive consequences for nobody”.

Finally, the most forthright response has to go to Hans van Baalen, leader of Dutch Prime Minister Mark Rutte's VVD party in the European Parliament, who argued that:

“Italians must elect who they want to elect and must bear
the consequences when they elect clowns."

There are plenty of rumours coming our of Italy that Pier Luigi Bersani - whose centre-left coalition holds a solid majority in the lower house of the Italian parliament - is trying to court Grillo somehow. But Grillo may well continue to resist any formal coalition arrangements with other parties - after all that was his entire thing in the run-up to the elections.

Yesterday, he insisted on La Cosa, the Five-Star Movement official TV / radio online station, that he is not going to make inciuci, inciucetti, or inciucini - Italian slang to describe backroom deals - with anyone.

We talk about programmes. We're not against the world. We'll see reform by reform, law by law. If there are proposals that fit with our programme, we'll consider them.

So this seems to suggest that Grillo could be willing to offer occasional, case-by-case support in parliament - provided that the proposals on the table are in line with the Five-Star Movement manifesto. That's a very similar to minority government arrangements elsewhere, where individual parties are relied on to push through certain measures.

But even if such a deal between Bersani and Grillo can be struck, it isn't exactly a recipe for (eurozone) stability - not least given some of Grillo's actual economic policies.

We will be over Grillo like a cheap suit, so keep reading our blog and follow us on Twitter @OpenEurope or @LondonerVince for all the latest updates from Italy.

In the flash analysis we published this morning looking at the results of the Italian elections and the various complexities involved in the country's political system. Here is a brief timeline of what will happen next.

15 March: First seating of the Italian parliament (both chambers).

By 20 March: The speakers of both chambers should have been elected.After 20 March: Italian President Giorgio Napolitano starts official consultations on the formation of the new government. The President usually talks to the leaders of the political groups in the Italian parliament and the speakers of the two chambers. Before that, though, political parties will talk to each other so we may already get a clearer idea (or not) of possible alliances. Bersani is likely to be the first asked to form the new government, as his coalition holds a majority in the lower house.15 April: Procedures for the election of the new Italian President are due to start (unless he decides to step down earlier, see below).
15 May: Mandate of Italian President expires.

As always Bild Zeitung cuts to the chase. Its headline on the Italian Elections in today's edition reads "Grand Confusion! Italians elect government of chaos". For good measure, the online version adds "Will they now destroy our euro"? The "our" in that sentence won't go down well in all corners of Europe...

Of course the situation is very much developing, but this has the potential to make the relationship between Rome and Berlin far more complicated, and further entrench the eurozone North-South stalemate (as we noted in our pre-election briefing). The subsequent response of the German media and public opinion will be very interesting.

Monday, February 25, 2013

So we now have a pretty good idea of the election results in Italy. And there are two victims: eurozone stability and Mario Monti.

The winner: comedian-cum-politician Beppe Grillo.

We knew from earlier today that there would be a hung Senate, meaning massive challenges ahead in forming a functioning government.

But what about the Lower House - Camera dei Deputati? Well, counting is almost completed so these projections of how seats will be allocated (courtesy of Rai) will most likely be very close to the final results. Bersani's centre-left coalition managed to secure a majority. The gap between Bersani's centre-left coalition and Berlusconi's
centre-right coalition is around 0.4%, so the huge difference in seats
is due to Italy's electoral system (which gives the coalition or party with the most votes an automatic majority of almost 54%).

But this is the shocker: Beppe Grillo's Five-Star Movement - the party that came out of nowhere and whose leader wants to hold a referendum on both euro membership and the restructuring of the country's debt - looks set to become the largest party in the lower house, and the second-largest one in the Senate. This is exceeding all expectations (though we warned you!).

Grillo is going to win 110 seats, more than double those of Mario Monti - the outgoing technocrat PM who was the clear favourite in Berlin and Brussels. Monti will only have 46 MPs at his disposal.

The scale of this defeat was pretty obvious at the press conference that Monti gave earlier today, in which he said he was "very satisfied" with the election results but was visibly emotional.

In contrast, a relaxed but triumphant Grillo chucked about "having another hot tea and then going to bed" when interviewed by 'La Cosa' - the Five Star Movement's official radio/TV station.

That so many Italians voted for anti-austerity parties also bodes ill for the ability of the eurozone to press ahead with its cash-for-discipline recipe. We will provide a more detailed analysis once the final results are in. But for now at least, there's no doubt about who's having the last laugh...

N.B.: The breakdown above does not include the 12 MPs elected by
Italians residing abroad and the MP elected in the Valle d'Aosta region,
who are
subject to different rules - a small caveat which does not change the
bigger picture.

Update 18:32: the projections for the Lower House are starting to come in and it'll be a close one. The first RAI projection has Bersani's centre-left coalition on 29.1%, Berlusconi's coalition on 28.6% and Beppe Grillo going even stronger than in the Senate, at 26.3%. Again, the Five Star Movement - the party that has toyed with pretty clear enti-euro rhetoric - is set to become Italy's largest single political party (don't say we didn't warn you). 18 to 24 year olds are allowed to vote in the Lower House elections, whilst 25 is the threshold for the Senate elections, which possibly explains the additional Grillo bounce.

Update 17.50: It's not looking any better. These elections now look like producing a hung senate (though much can still happen). This projection is from La Repubblica:

If this holds, none of the coalition arrangements discussed before the elections will achieve a majority in the Senate. Under this scenario, Berlusconi's centre-right coalition would win 123 seats, Bersani's centre-left coalition 104, Beppe Grillo's Five-Star Movement 58 and Mario Monti's pro-reform bloc only 16.

So there are basically three options: A national unity government (if Bersani, Berlusconi and Monti join forces - could be possible if leading to fresh elections soon afterwards), a sensational Bersani / Grillo coalition (unlikely) or re-run election within 2-3 months. If we have re-run elections, there will be a lot of pressure to change the electoral law beforehand to avoid a similar stalemate to that which could occur now. For that, of course, you need a majority in both houses...

As we've said repeatedly over the last year: this one will be very complicated and uncertain...

------------

The first projections are in. And the results are the stuff of nightmares if you sit in Brussels or Berlin.

Now, the thing to remember is that seats in the Senate are allocated on a regional basis so overall support nationwide doesn’t necessarily translate into a corresponding number of seats. But the projections so far show the following:

Monti – the darling in Berlin and Brussels – is taking an absolute hammering

Under the current projections, Berlusconi could prevent a centre-left majority and there could be a hung Senate.

Italians are coming out in droves to vote against austerity, with Beppe Grillo’s pro-euro referendum, sort-of-anti-euro Five Star Movement being the largest individual political party in half of the projections so far, and third with respect to Coalition arrangements (Grillo won’t join any coalition arrangements)

All eyes are now on the region of Lombardy, which, given the huge number of senators it provides, is likely to be crucial to the fate of these elections.

How big of a problem can a country accounting for 0.2% of eurozone GDP possibly be? Well, potentially pretty big it seems.

As expected Nicos Anastasiades, the centre right candidate, was yesterday elected President of Cyprus winning 57.5% of the vote in the runoff election – the highest vote share in 30 years. Anastasiades, along with other eurozone leaders, has said he is keen to move quickly towards finalising the Cypriot bailout which was first requested in June 2012 – meaning it has been in the pipeline for 8 months. Usually the fresh election of a reform minded government with a large majority paves a clear path for a bailout. While, it is true that the previous communist President Demetris Christofias has been an obstacle to finalising a bailout by refusing to countenance any privatisations, the path to a bailout is still littered with hurdles.

The first hurdle is the banking sector which needs a massive recap of €10bn (50% of GDP). Over the past decade it has swelled to seven times the size of Cypriot GDP, mostly off the back of a huge inflow of foreign (mainly Russian) money attracted by the low tax rate and reported lax financial regulation. Unfortunately, despite requiring a significant restructuring and overhaul, for which taxpayers should not foot the bill, there is a very limited amount of bank debt to ‘bail-in’ (circa €3bn against €128bn of assets). This leaves few options. One is writing down depositors, although the threat of contagion and the unprecedented nature of this means it remains someway off for now.

The second issue is fiscal. Cypriot debt has been increasing rapidly, already standing at around 84% of GDP. Adding the burden of a €17bn bailout would take it to 140% - far from sustainable. However, restructuring the sovereign debt is not much easier than the bank debt. Around half is issued under UK law, meaning the Cypriot parliament cannot simply pass a law restructuring it (as Greece did). The other half is predominantly held by shaky Cypriot banks making any write down counterproductive as these banks would simply need an even larger recapitalisation. The rest takes the form of official loans to EU countries and institutions – unlikely to take losses, as Greece has proven.

The confluence of the above problems ultimately makes this a very tricky political decision. The Cypriot bailout and the presence of large Russian deposits and lax financial regulation (in Germany’s view at least) is now becoming a topic in the upcoming German elections. As we noted in today’s press summary, a DPA poll over the weekend showed that 63% of Germans are opposed to a Cypriot bailout whereas only 16% are in favour. The SPD has also made this a point on which to differentiate themselves from the governing CDU. On the other hand the politics in Cyprus are also tricky. Many in the country are expecting a show of solidarity from the eurozone given that half of the bank recap needs are a result of Cyprus wilfully taking part in the Greek debt restructuring. And is Cyprus really systemically important, given its tiny size? Many would say it is not, however, as the problems above highlight there is substantial potential for contagion, not least because any radical solution would challenge the view that Greece is “unique and exceptional”.

Taken together, this represents a minefield of issues to negotiate when formulating the Cypriot bailout. Unfortunately, the technical and legal challenges balanced with the fragile turnaround in the eurozone mean that at this point in time it looks likely that eurozone taxpayers will be forced to foot the bill once again – albeit with very strict conditions and a significant financial overhaul. Potentially the most worrying thing about this bailout is how familiar the problems all seem. The banking issues are similar to those in Ireland and Spain, the fiscal challenges to those in Greece and the political ones, well, to everywhere. One thing that the Cyprus issue makes abundantly clear is that the eurozone lacks any new tools to overcome these very familiar problems. Of all the issues mentioned above, that may be the most ominous for the future of the euro.

Elections in Italy are always spread over two days. Yesterday, about 55% of Italians cast their vote - marking a sharp 7.4% decline in turnout compared to the first day of the previous general elections in 2008. Turnout was generally much higher in the North than in the South of the country.

Polling stations will close today at 2pm GMT. How long will we have to wait to know the results? Here's an approximate timeline, although a lot will depend on how speedy the counting is (all times are GMT):

2pm: Polling stations close, and the first exit polls are released. Exit polls can give a first idea, but clearly have to be taken with a pinch of salt (they were quite far from the final outcome in the 2006 general elections, for instance). Counting starts shortly after closure, and Senate votes will be counted first.

3pm: First projections for the Senate are expected. These are going to be updated quite often - presumably every hour. The more votes are counted, the more reliable the projections. Have a look at our pre-election briefing to get a clearer idea of why the balance of power in the Italian Senate is key to these elections.

From here on, everything really depends on how quickly/smoothly the counting goes. Each polling station is free to start counting the votes for the lower chamber after all the Senate ballot papers have been counted.

Around 7-8pm: Counting for the Senate should be over everywhere in the country. Counting for the lower chamber usually takes longer, given that only people aged over 25 are allowed to vote for the Senate - while everyone aged over 18 can vote for the lower chamber.

Around 11pm: It should be possible to get a good idea of the outcome for the lower chamber, although the final results will probably only be announced tomorrow morning.

The website of the Italian Interior Ministry (see here) will update the results real time, as they arrive from polling stations across the country. But to those who don't speak Italian and want the most important info from a variety of sources we recommend following us @OpenEurope or @LondonerVince

Friday, February 22, 2013

It’s been a somewhat less than pleasant morning for the eurozone. Firstly, the European Commission put out its latest economic growth forecasts, which do not make great reading for many countries. Here is a comparison between the EC's forecasts and the latest national government forecasts for growth:

As the table shows, there is a long list of countries which seem to be overestimating their growth for this year including: Italy, France, Spain, the Netherlands and Ireland.

We expect to see a series of growth revisions throughout the year on the part of national governments – in some cases such as Greece, we expect that the Commission forecasts will also prove overly optimistic (notably the figures used in the Greek budget are actually below the Commission forecasts). The figures also highlight the growing cracks in the Franco-German axis as the two countries diverge economically; this was reinforced by the starkly different PMI (business activity) figures yesterday.

The implications of these inflated growth projections are also becoming apparent. Nowhere is this clearer than in Spain, where the Commission highlights that, without additional measures, the Spanish government deficit in 2013 and 2014 will be 6.7% and 7.2% of GDP respectively. This compares to targets laid down by the eurozone of 4.5% and 2.8% respectively.

The Commission’s estimates of Greek unemployment also still seem unrealistic, at 27% and 25.7% in 2013 and 2014. In November 2012 unemployment reached 27% in Greece, according to the Greek statistics agency. With plenty of structural reforms still to go we expect this figure to increase further.

Secondly, the announcement of the repayment of the ECB’s second Long Term Refinancing Operation (LTRO) came in significantly lower than expected – 356 banks repaid €61.1bn compared to average expectations of €122.5bn. The steep slide in the euro exemplified the market response.

This highlights that underneath the recent optimism there is still significant fragmentation in financial markets and concerns over liquidity (as we have noted previously). Although impossible to tell conclusively, since these are just aggregate figures, we expect that many of the banks that have repaid were from ‘core’ eurozone countries, further exacerbating the differences between eurozone countries.

If you are looking for a silver lining, it could be that the rise in the euro has been halted for now, which may aid the competitiveness of the weaker countries, and that a potential de facto tightening of monetary policy has been avoided - this could have been a concern if banks repaid the LTRO and deleveraged rather than investing the collateral elsewhere.

The picture emerging from this morning’s data, then, continues to be a bleak one for the eurozone thanks to stalling growth across the bloc and banks hanging onto ECB liquidity. Beyond the headlines though, there is evidence of growing divisions as some of the core countries post growth and their banks repay ECB funding while peripheral countries find themselves in economic decline with banks surviving on ECB money but lending little.

This story most certainly caused officials in Brussels and Berlin - at least those who read the Italian press, or alternatively our daily press summary which was the first to break the news in the international sphere - to choke on their morning cappuccino.

Italian daily Il Corriere della Sera reports that, according to some internal opinion polls carried out by centre-left parties, the Five-Star Movement led by anti-euro comedian Beppe Grillo could become the second-largest party following the 24-25 February Italian elections.

It's true that the international media has over-stated Grillo's
anti-euro stance - Europe is not one of the Five Star Movement's key
pillars. But Grillo is definitely toying with the idea of Italy ditching
the euro, and has said Italy should hold a referendum on its membership of the single currency. He has written stuff like this on his blog, for example:

In order to remain in the euro, we are starving the country…If we had
the lira, we could solve our debt problem through a devaluation of our
currency.

So think about it again: an anti-euro politician may finish second in the Italian elections - Italy arguably being the most pro-EU country of the lot.

And there's an element of panic going on.

In an interview with Le Figaro, Italy’s former Foreign Minister
Franco Frattini (who is also a former EU Commissioner) says,

I don't rule out [Grillo’s Five-Star Movement]
finishing second…This would be a tragedy comparable to [far-right
leader] Geert Wilders' irruption into Dutch politics. One would then
need to take into account the failure of the European idea in Italy.

These polls also raise serious questions over whether whether Mario Monti’s centrist bloc will win enough seats to be the kingmaker in the Italian Senate.

Mario Monti has never claimed to be a professional politician. His lack of political experience became evident when he said,

[German Chancellor Angela] Merkel fears the success of left-wing parties [in Italy], especially in an election year for her. I don't think she has any desire to see [Pier Luigi Bersani's] Democratic Party arrive in government.

Merkel's spokesman, Steffen Seibert, quickly shot Monti down.The German Chancellor "has not made comments on the Italian elections. Nor did she do any in the past", he said.

Though it may seem like a minor event, the Italian press was all over it. And it's interesting as it may play straight into Silvio Berlusconi's hands. The man has built his election campaign on strong and uncompromising anti-German austerity rhetoric. He might be minded to ask if Monti cares more about Merkel than Italian voters?

This also illustrates how potentially counterproductive it is for German politicians to wade into the Italian election debate. Merkel may not endorse a candidate, but it is pretty obvious who the Germans don't want to see in power.

Whoever forms the new [Italian] government, we count on the pro-European course and the necessary reforms to continue.

The more extraordinary since these politicians are all supposed to be Berlusconi's 'fellow' centre-right politicians. Now, the big question is, will this kind of stuff coming out of Germany boost or reduce Berlusconi's chances, given that it fits perfectly within his narrative that Italy is being kicked around by Berlin? Remember when a whole host of Europeans lined up to oppose George W. Bush (not that we compare the two) in 2004, acting as the ideal recruitment sergeants for the Bush campaign...

If you want to know what we think about Berlusconi, the Italian elections and what they mean for the future of the eurozone, check out our new briefing outlining a number of post-election scenarios. And follow us on Twitter @OpenEurope or @LondonerVince for real-time updates from Italy.

Thursday, February 21, 2013

The ECB has just released details on its holdings of government bonds bought under the Securities Markets Programme (SMP) for the first time, see table below (click to enlarge):

To be honest, the figures are much as expected – although the holdings of Greek bonds will have decreased due to a fair amount of the holdings maturing (circa €10bn over the course of the SMP). The holdings of Italian bonds are interesting, given that we knew the ECB purchased almost €145bn of Spanish and Italian bonds, it is possibly a bit surprising that the level of Italian bonds outweighs Spanish so significantly (although it does broadly match the relative size of their debt markets). Still it highlights that necessary intervention to simply keep yields in these countries to below 7% was still very sizeable.

The move is positive for the transparency of the ECB (if a little late). Let us hope this is the start of a trend rather than a one off…

They’re still those who talk about a “multi-speed” Europe as something of the future. Well, first, as ever, multi-speed is an inappropriate expression – the point is that the end destination for different EU countries no longer is the same (i.e. the Eurozone and the UK). Secondly, different levels of participation are already a fact of life in the EU.

This week's decision by EU ministers to launch the EU’s unified patent court is a case in point. The Court is set up to police the EU’s new single patent system, which was agreed in 2011 under enhanced cooperation. Spain and Italy have already said they won’t take part (though curiously Italy signed this week's agreement, but says it will have none of the unitary patent system). In addition, Poland and Bulgaria didn’t sign the agreement, but remain open to joining later. The reasons for not signing vary, from principal language concerns (the working languages will be English, French and German only) to cost concerns. Incidentally, we note that the Polish government has been pretty critical of those who do not support ‘more Europe’, but in a short period of time, it has now ditched the single EU patent and vetoed the EU’s carbon roadmap.

In any case, this is flexible Europe in action.

Overall, the single patent will massively reduce cost. From 1 January 2014, inventors and SMEs will now only have to apply for and register the patent once, and gain protection in all member states. This will reduce the burden on entrepreneurs/innovators and slash the cost of patent enforcement. The establishment of this Court excludes the ECJ, which is a positive step, though there’s currently a pending court case brought by Spain and Italy who say the whole affair violates EU law.

As agreed by the European Council in June, the seat of the Court’s central division will be in Paris but two other thematic divisions will be created: one in London for chemicals and human necessities, the other in Munich for mechanical engineering.

It only took 37 years. But better late than never – and credit to EU ministers for making this happen, and the Commission for pushing it.

"will face a tougher challenge over the next few years because of the possibility
of a prolonged lack of spare power station capacity."

Very true, but this should have come as no surprise to anyone - Ofgem was already highlighting a serious generation gap in its October 2012 assessment - as others have for many years. To cut a long story short policy decisions (and the lack of policy decisions) over decades mean that, in Ofgem's assessment, by 2016/17 the excess capacity of UK electricity generation over demand is predicted to fall to just 5%. And that is a mid-point estimate - so if demand is higher (a cold winter), there are delays in building new gas plants or a problem with existing plants, there will be even greater problems dealing with peak demand.

In the short term this problem is exacerbated by EU environmental laws that require the closure of large coal plants. This is in addition to the closure of nuclear plants which are coming to the end of their lives.

This is a looming problem for the UK and something politicians of all stripes should be aware of given the political resonance of higher fuel bills and the possibility of black outs. Other than building more coal or gas plants, immediate action could require the UK to seek to renegotiate its legally binding commitments with the EU, something that has been highlighted by the EU Fresh Start Group of MPs. The UK's electricity generation at the moment:

DECC 2010

This is what Ofgem thinks could happen to this capacity﻿﻿﻿

Ofgem highlights that on a midpoint prediction the UK will only have a 5% safety threshold

So why is this all happening now? Well there are two parts to this. Firstly we have the failure of domestic policy. E

nergy generation has become a political football with politicians from all parties promising to reduce CO2 (a vote winner) without committing to the policies and costs required (a vote loser). Creating new energy generation capacity requires a long lead time, something the current political culture is seemingly ill fitted to.

Secondly, we have the EU. The UK has signed itself up to some of the most ambitious/unrealistic (delete as appropriate) legally binding environmental legislation in the world. Specific to power generation are the following:

2009 Renewables Energy Directive

The renewable target requires the UK to shift from just 1.3% of total energy (i.e. not just electricity) from renewables in 2005, the baseline year under the EU Directive, to 15% by 2020 – the largest proposed increase of any member state. The consensus is that the 15% target is likely to require the UK to produce 30-35% of its electricity from renewables by 2020, because it is far harder to source energy for transport or heating from renewables. This is obviously a big ask and it is not clear where the energy will come from.

If you look at the graph above Ofgem puts a large proportion of the generation gap down to the decommissioning of coal fired power stations. This is important as coal (unlike wind) is a base load generator and can respond to peak demand. Unfortunately many of these coal plants are due to close.

﻿

Kingsnorth coal power station due to be closed by EU emissions legislation

This is due to the
LPCD, which is designed to reduce the amount of
sulphur dioxide, nitrogen oxides and dust emitted from large conventional power
stations. Existing plants had the choice to either comply with the new targets
by installing new technology to remove emissions or remain open for a limited
period only. In the UK, 11GW of capacity opted out of the Directive and will
consequently have to close in 2015 - and some will close sooner. In fact, Ofgem notes that, "power stations 'opted out' under the LCPD are using up their running hours faster than expected" and that "most LCPD opted out plant will come off the system well before the 2015 deadline."

In addition, the EU's Industrial Emissions Directive will place restrictions on the operation of some existing coal and older gas stations from after 2016/2017.

So what can be done?

The problem needs a solution in two parts. Firstly the UK needs a huge amount of investment in new generation capacity of all flavours.

“Around a quarter of existing power plants in the UK are due to close by 2020. Replacing this capacity will require up to £110 billion of investment in new generation and grid connections by 2020. Compared with the last decade, rates of capital expenditure on energy infrastructure will need to double."

A second option to escape the short term generation crunch brought on by the EU's LCPD could be to seek to negotiate for a UK opt-out or extension from the Directive. This could for instance come in the form of a limited exemption for a number of hours at times of peak demand. The problem with this is the Directive is legally binding and so would require other EU states to agree.

Will the Coalition attempt to re-negotiate a partial exemption? Well it is clear that a large number of Conservative MPs are becoming wary of how higher fuel bills and possible blackouts could reflect on them in the next election. The EU Fresh Start group of MPs has for instance called for the renewables and LCPD to be reviewed. This is what their manifesto says:

"The UK should renegotiate, or, if unsuccessful, suspend its obligations under the 2009 Renewables Directive, and not sign up to further commitments with respect to renewable energy targets. Our own roadmap (which would replace it) should maximise the cost efficacy of the reduction measures taken."

"We should review the timescale of the Large Combustion Plant and Industrial Emissions Directives with particular reference to the requirement to close down our large coal burning stations. To the extent we believe that premature closure is causing an unacceptable impact on fuel poverty or energy network resilience, we should extend their lives. We should make it clear to our EU partners that the large scale construction of unabated coal stations while we switch ours off is not a fair or an acceptable position."

Will this happen? Well David Cameron's commitment to re-negotiation is only for the post 2015 Parliament which might be too late. So could there be a case for early action? Yes, but immediate action seems unlikely, at least for as long as the lights are still on. Both the Conservatives and Liberal Democrats have reiterated their support for legally binding renewables targets and if Labour were to return to Government they were the party that originally put them in place!So, expect to hear more about the looming energy crunch and expect the political temperature to increase.

The most resolute defenders of the European parliament often argue that it is the home of ‘transnational democracy’ where MEPs look after the interests of European citizens. However, in Monday's debate on the EU budget deal – struck by national leaders – reactions of the leaders of the Parliament’s four largest political groups which we cited on our blog showed just how far from reality this assertion is.

The leaders of the EPP, Socialists and Democrats, Liberals and Greens all attacked the compromise, and demanded renegotiation. They all claimed to speak on behalf of their factions but in reality these tend to be hugely fragmented along national lines, a handful of ‘true believers’ aside. For example, the views of Dutch, Swedish, Danish, British and German MEPs – whose national leaders backed cutting the budget – were barely reflected. Moreover, in the UK and Holland in particular, the need for restraint in the EU budget was an issue of cross party consensus, and not of ideological contention.

Consequently we were treated to the bizarre spectacle of Labour MEPs sitting behind S&D group chairman Hannes Swoboda as he lambasted the budget cut which Labour leader Ed Miliband had demanded. The same applies to Moderaterna MEPs listening to EPP group chairman Joseph Daul and VVD and Lib Dem MEPs listening to the BBC-favourite Guy Verhofstadt ("he's always available"). Meanwhile, Martin Callanan of the ECR group, composed mainly of MEPs from the Conservative party and Poland’s Law and Justice party, broadly welcomed the deal.

However, in a inverse version of the above phenomenon, a debate in the Polish parliament yesterday morning, the Law and Justice representative argued that the budget deal was bad for Poland, in particular the failure to obtain more funds for rural subsidies and to obtain parity in direct payments with the EU15 countries, citing the speech by Jospeh Daul in support of his argument – the same Daul accused by Callanan of “throwing a teenage tantrum”. Meanwhile, referring to the fiscal treaty, the same Law and Justice MP claimed it would "murder solidarity in Europe", a view ostensibly more suited to the socialist and far left than conservative groups.

Particularly when it comes down to the core issues in a democracy - such as taxation and spending - it's still all about national politics, and securing the best possible deal for domestic constituents and trying to inflict damage on their domestic political opponents. A genuinely transnational politics in the EU is nowhere near to becoming a reality.

Tuesday, February 19, 2013

There has been a lot of Romania-bashing going on lately - from immigration to horsemeat. But in Europe there's always more to a story than meets the eye. Looking at the latest Internal Market Scoreboard, released by the European Commission today, it turns out that Romania - along with some of the other new EU member states - are actually the best Europeans around. At least by this measure.

It reveals that,

When all enforcement indicators are taken into account...Romania, Estonia, Cyprus, the Czech Republic and Lithuania are the best overall performers.

By the same measure, countries that tend to call for more EU integration and more EU laws, are actually the worst at implementing them. Belgium, Spain and Italy are consistently bad at abiding by their commitments. The UK tends to float around the average, but this time it is slightly worse on three of the indicators.

Below is the "Internal Market Enforcement Table" (click to enlarge), which includes the "enforcement indicators" that the Commission takes into account in its assessment (red = bad, yellow = average and green = good):

In 2012, we looked at who had been the "naughtiest Europeans", using the number of ECJ judgments as a measure, in which Romania also did well. However, this might also have had something to do with the fact that, along with Bulgaria, it is a relative latecomer and cases tend to take a while to get to the ECJ. And, of course, complying with EU laws in the eyes of the Commission is not necessarily the same experience that individuals and businesses enjoy in practice. Nevertheless, today's Scoreboard might challenge some stereotypes.

The discussion over bank bonuses has been heating up inrecent days. Discussions between EU ministers, the European Parliament and the
Commission (so-called trialogues) are restarting today as the three try to reach an agreement on
the rules for bank bonuses to be included in CRD IV (the EU’s legislation implementing
the Basel III rules and more).

The parliament is pushing for a stringent cap on bank
bonuses of 1:1 ratio with fixed salaries, which could be increased to 2:1 with
approval from a majority of shareholders.

There is a lot going on here, beyond the actual proposal, including:

The UK is in a clear minority in categorically rejecting a cap, but unable to block a rule with disproportionate impact on the UK - courtesy of QMV and co-decision.

Germany being the swing state - no surprises there - having first supported the UK's position, it has shifted as part of a wider political push to get tough on bankers, which strikes a chord with German voters. The revelation in December that Deutsche Bank hid $12bn worth of losses
during the crisis and the growing Libor and Euribor rates scandals, haven't exactly helped...

The European Parliament flexing its muscles, successfully managing to tap into the public mood, breaking the Council common position, which is unusual. (Don't worry, any favour EP thinks it wins with the electorate, would be ruined if it voted down Ministers' proposal for a reduced long-term EU budget).

"Anglo-Saxon capitalism" in the docks - perception is one of a continental attack on British bankers (ironic since a large part of the talks have focused on making CRD4 more flexible to allow the UK and others pursuing tougher capital rules for banks). This will not make the City any more EU-enthusiastic.

No one wants to be publicly seen to back bankers - even the UK government itself is keeping a low profile.

Changing incentives as part of the eurozone banking union, with the club within a club dynamic again coming to the fore (see our December 2011 report to see what we mean). Looking forward, the question is, if a country decides to remain outside the banking union - therefore signalling that it will stand behind its own banks, come what may - should it not also have more discretion in getting the incentive structure in the banking sector right?

So what does the UK want?

On Friday the UK submitted a paper to its EU partners to
put forward it’s case. We've seen the paper, and here are some thoughts / points - which also have been largely reported in the media:

The UK argues against a firm cap. Any extended
remuneration should be determined by shareholders (although the UK proposal
does water down the size of the majority needed to approve remuneration
slightly).

The UK is pushing for a focus on non-cash deferred
bonuses. This is included in the current proposal to some extent but the UK
fears (with some grounding) that the current proposal will encourage an
increase in fixed salaries and a focus on upfront cash bonuses - and reduce firms' ability to cut costs during a downturn, potentially leading to more lay-offs and less lending (on a bit less solid ground here, we think).

It also argues that deferred non-cash bonuses (over
three years) should not fall under any cap, while also rejecting the proposal
that all employee benefits, above those mandated by law, should be categorised
as a ‘bonus’.

The government is also keen to see that subsidiaries of
EU banks located in the rest of the world should not have to adhere to the
rules. Furthermore, EU subsidiaries of banks headquartered outside the EU
should not have to implement the rules (although their bonus plans will still
need to be judged ‘prudential’ by the relevant financial supervisor).

So is this special pleading? Well, to some people in the City, the world will end if this comes into force - which is not quite the case. In fact, there's no surprise that politicians seize the opportunity to strike down on bankers' pay, given that many banks have been forced to seek taxpayer-backed bailouts and the rest of it. So the first message to the financial sector is: if you don't want to be subject to tougher regulations, stop screwing up.

But it could still be damaging and there are questions over how much difference a cap would really make on incentives and the distorting effects this could have across the board. Ultimately, the risk taken on and the decisions made by banks are dictated by much more than just bonuses - it is just a small part of a wider culture which needs to be reassessed. Targeting and correcting perverse behaviour still seems to be better done through more effective supervision and tighter regulation - the irony should not be lost that many of those pushing for a cap are also the ones advocating a maximum limit to capital levels and supporting watering down the Basel III liquidity requirements (see here for details). And there should be no doubt that this could make talent less likely to choose the EU over other part of the world, which clearly isn't in anyone's interest.

In the end, bank bonuses are also only a
small part of the much larger CRD IV legislation. There is unlikely to be a
formal vote on bank bonuses itself - and Ministers rarely vote in the Council - but the UK seems to be heading for a defeat on a pretty symbolic issue at a sensitive time.

On the other hand, if the UK government can pull this one off, it should be given a lot of credit. Ultimately, the final outcome of CRD IV as a whole will be the more important bellwether by which to judge UK success or failure.

Monday, February 18, 2013

This afternoon EU Council President Herman Van Rompuy appeared in front of MEPs to give his account of the deal struck by national leaders on the EU's next long-term budget. MEPs, many of whom have strongly resisted any budgetary discipline at the EU level were far from happy. Below are some reactions from the speakers on behalf of the four largest groups in the parliament.

So a pretty united front - so much for pluralism and diversity in the EP (although Martin Callanan of the ECR - the fifth largest group - did broadly welcome the deal). We can only imagine what MEPs from Angela Merkel's CDU/CSU, Fredrik Reinfeld's Moderaterna, Helle Thorning-Schmidt's Social Democrats (and even Ed Miliband's Labour party which backed a cut in the HoC vote) or Mark Rutte's VVD must have made of their group leaders' speeches.

The full-throated desire of many MEPs to renegotiate what they see as a bad deal is also noteworthy as they tend to be the same people who can be counted upon to strike down any talk of national parliaments and/or governments from trying to get a better deal at the EU level as being not only impossible to achieve but also 'anti-European' by its very nature.

'We are in the middle of the beginning of the end. The crisis has really hit its peak”, former French economy minister and current IMF chief Christine Lagarde told a broadcaster when asked about the eurozone crisis. The only problem: that was in July 2010.
Time and again, EU leaders have declared the crisis over – and been proven wrong. So with markets remaining cautiously optimistic about the euro, is the worst finally behind us?

There are well-rehearsed reasons to be cheerful. Borrowing costs are down for all crisis-stricken countries, exports are picking up in some and EU leaders have actually agreed on a forward-looking measure by turning the ECB into a single supervisor for eurozone banks.
Just as eurozone leaders have celebrated prematurely, Anglo-Saxon analysts have consistently tended to overstate the immediate risk of a eurozone break-up. Famously, one major US bank last year assigned an 80pc-90pc risk of Greece leaving the euro – an assessment that Open Europe cautioned strongly against. In Europe, the safest money is always on another fudge. Germany and the ECB were likely to take a political decision to keep Greece inside the eurozone for now, given the fragile situation elsewhere.

But the news last week that the eurozone economy shrunk by 0.6pc in the last quarter of 2012 illustrated what was always the bloc’s greatest challenge: reversing chronic economic malaise.
Most fundamentally, reconciling a supranational currency with 17 national democracies remains a challenge. The eurozone’s basic austerity-for-cash prescription continues to fuel tension within individual countries and between the hawkish north and the austerity-fatigued south, testing voters’ patience.
The forthcoming Italian elections are turning into a bit of a referendum on EU-mandated austerity, just like the Greek elections last year. Five of the seven main political parties – together polling at around 50pc – have vowed to end cuts. Two parties, Lega Nord and the Five Star Movement, the latter led by comedian-cum-politician Beppe Grillo, even want a referendum on whether the country should remain in the eurozone. The everlasting Silvio Berlusconi is making last-minute gains, in part thanks to a promise to kill what he calls “austerity imposed by Europe”. Against all known principles of common sense, the man still could win. Thankfully, a broadly pro-reform, centre-left coalition led by Pier Luigi Bersani is the most likely outcome, but even then the hope of sweeping economic reforms will be tempered, not least due to those parties’ strong links to the unions.

The Italian elections show how the north and Club Med in many ways are locked into a Catch-22: one wants cash (“solidarity”) first, supervision or discipline second, the other the exact opposite. That dynamic is again evident in the ongoing difficulties in agreeing a bail-out for Cyprus: Germany is unwilling to put in cash for fear of rewarding the bloated Cypriot financial sector. Cyprus resists far-reaching privatisations or significant write-downs of its banking or sovereign debt.
This north-south stalemate could become further entrenched if French president Francois Hollande continues to slide towards the Mediterranean bloc, both in terms of political temperament and growth rates (France registered zero growth in 2012). This would weaken the Franco-German axis.

And beyond politics, has the eurozone’s triple crisis – fiscal, banking and competitiveness – really been addressed in any fundamental way? Many eurozone countries are on the path to running a primary surplus – meaning income exceeds outgoings, excluding the cost of servicing a country’s debt. But the eurozone’s overall debt still stands at 90pc of GDP, compared to 70pc in early 2010. Greece, Italy, Portugal and soon probably Cyprus, have debt levels exceeding 120pc of GDP – double what is meant to be allowed under eurozone rules.

The banking sector, too, remains fragile. Thankfully, ECB action helped avoid a massive bank funding crisis last year, but there is a price: eurozone banks have become alarmingly reliant on artificial life support. Liquidity from the ECB to banks now tops €1 trillion (£860bn) – up €140bn on 2009. Even though some banks have started to pay back the cash they owed the ECB early, the eurozone is a long way off a back-stop to allow for wind-downs of bust banks or disentangling of bank and government debt. Overnight interbank lending – a key indicator of banks confidence in the system – remains only half of what it was in 2009 and a third of its peak in 2007. If the crisis were solved, this would surely not be the case.

Finally, by almost every indicator, the single currency is absolutely riddled with economic imbalances, but with no fiscal facility to compensate for them. Encouragingly, Spain, Portugal and in particular Ireland have cut unit labour costs relative to Germany – a key measure of competitiveness - but Italy and France are actually becoming less competitive in relative terms. And imbalances go far beyond labour cost. This year, Greece is expected to contract by over 4pc, Spain by 1.5pc and Cyprus by almost 2pc – while Germany, Finland and others are set for growth.
Then there is unemployment. Shockingly, Greek unemployment hit 27pc towards the end of last year, with youth unemployment close to 62pc. Spain is not much better at 26pc and 55pc respectively – and all the scheduled reforms and cuts haven’t even been implemented yet. In Germany, meanwhile, unemployment is at record lows.

In a best-case scenario, the Mediterranean countries will follow the Irish example and continue to squeeze wages and cut costs at home. But in light of domestic political resistance, these imbalances could well continue to test the eurozone’s one-size-fits-all model for a very long time.

So, we have an election fought over EU austerity, political stalemate, a bail-out which no one wants to pay for, abysmal growth forecasts and massive unemployment. There may come a day when the eurozone bounces back and puts us all to shame. But to celebrate now the “end of the crisis” seems to be setting the bar exceptionally low.